CPP 2025 Enhancement: Why Your Paycheque Is Taking a Hit

Love it or hate it, CPP has seen major changes since 2019, including the recent CPP2 bump. While some call it a scam, others see it as a crucial necessity. So why are there these opposing and polarizing views?

Let’s break down the exact changes of the CPP enhancements, why the government put it in place, then I’ll address the criticisms at the end to see if the skeptics have a point!

2025 (CPP) Enhancement Contribution Levels

The Canada Pension Plan (CPP) now includes two levels of contributions, with updated thresholds and rates that enhance retirement benefits, especially for higher-income earners. 

The following table outlines the CPP contribution rates for 2025:

Key Points

1. Regular CPP: Contributions are calculated on earnings up to the YMPE, in 2025 it is $71,300. Employers match employee contributions, and self-employed individuals pay the combined rate.
2. CPP2: Applies to earnings between the YMPE and YAMPE, which is capped at $81,200 in 2025. If you earn more than that, you won’t pay anymore in CPP. Source:

Let me show you how this works: 

Example 1: Mark (Earning $71,300)

Meet Mark, who earns $71,300 annually in 2025. His contributions are as follows:

• Total Contribution: $4,033.10 (matched by his employer).

Example 2: James (Earning $81,200)

Meet James earns $81,200 annually in 2025. His contributions include both Regular CPP and CPP2:

• Total Contribution: $4,429.10 (matched by his employer).

CPP Contributions By Income (2025)

Comments:

1. Max CPP Contributions: At $81,200, both Regular CPP and CPP2 contributions reach their respective caps, totaling $4,430.10.
2. CPP2 Contribution Threshold: Contributions to CPP2 apply only to earnings between $71,300 (YMPE) and $81,200 (YAMPE).
3. No Further Contributions Beyond YAMPE: For incomes above $81,200, total contributions remain the same at $4,430.10.

“Think of CPP2 contribution like an add-on to a streaming subscription; it’s an added cost, but you get extra benefits for your future.”

Designed to Replace of a Third of Income

The end goal of these changes are to replace more of your income. Here’s how that works. 

Key Components of the CPP Enhancements

1. Increased Income Replacement Rate
   • Previous Rate: The CPP replaced 25% of a worker’s average lifetime earnings.
   • Enhanced Rate: The replacement rate is set to rise to 33.33% of average work earnings, phased in over 40 years starting in 2019.

Examples of CPP Enhancements

You’ll now eventually receive significantly more in CPP when you retire, so in theory, once it’s rolled out completely someone earning:

Gradual Implementation Over 40 Years

The enhancements are being phased in gradually, which started back in 2019, so those retiring sooner won’t be seeing as big of an increase as someone retiring later. Here’s how that works:

• For Individuals Retiring in 2026:
  • Having contributed under the enhanced system for just seven years, these individuals will see a modest increase in their CPP benefits. For instance, someone earning $60,000 average annually might see an income replacement rate closer to 26-27% (approximately $15,600–$16,200 per year).
• For Individuals Retiring in 2059:
  • These individuals, having contributed under the enhanced system for the full 40 years, will benefit from the maximum 33.33% replacement rate. For the same $60,000 annual earnings, this equates to $20,000 per year.

If you want to know what the average CPP Canadians receive, check out my popular video on the channel.

Why are they enhancing CPP?

Strengthening Retirement Security: The 3 Pillars

Canada’s retirement income system is built on three key pillars:

1. Government Benefits (CPP & OAS)
2. Employer-Sponsored Pension Plans (liked Defined benefit, and defined contribution pensions)
3. Personal Savings (RRSPs & TFSAs)

Together, these are meant to provide a secure and comfortable retirement.

However, the retirement landscape has shifted. Traditional defined benefit pension plans, once a cornerstone of retirement security, are now rare. In their place are defined contribution plans that place investment risks squarely on employees, leaving many Canadians with less predictable and less reliable income in their later years.

To address this growing uncertainty, the government is enhancing the CPP, strengthening the first pillar of retirement income. These enhancements aim to provide a stable, inflation-adjusted foundation of guaranteed income that retirees can rely on, no matter the market’s ups and downs.

While personal savings and workplace pensions still play an important role, they are increasingly subject to volatility and individual decision-making. The enhanced CPP offers a safety net that reduces dependence on these uncertain sources, creating a more balanced and dependable approach to retirement planning.

By bolstering this foundation, the government is helping Canadians navigate the challenges of rising costs, longer life expectancies, and evolving financial risks.

Criticisms of the CPP enhancement

The (CPP) enhancements are meant to give Canadians more financial security in retirement, but not everyone is thrilled about the changes. Some big concerns revolve around the added costs for workers, employers, and self-employed individuals.

1. Financial Strain on Workers and Employers

Many are already complaining about the contribution increase from 4.95% to 5.95%, and now they are adding CPP2 for even more payments. For employees, the higher contribution rates mean less take-home pay, which isn’t great when living costs and inflation are already squeezing budgets. 

Employers also feel the pinch—they have to match these increased contributions, which can add up quickly. For smaller businesses, this could mean tough choices about hiring or cutting back in other areas. This could also have a hidden cost of employers simply paying their employees less, to make up for this difference. 

And if you’re self-employed, you’re on the hook for both the employee and employer portions, which can make managing your cash flow that much harder. 

We’ve heard firsthand from clients concerned about the impact of these enhancements, especially employers struggling with the added costs for their teams. In these cases, we work closely with them to create customized strategies that balance these new obligations with their broader financial goals.

2. Broader Economic Concerns

On a bigger scale, there’s worry about how these changes might affect the economy. If employees are bringing home less money, they’re likely to spend less, which could slow down economic growth. For businesses, higher payroll costs might mean putting off plans to grow or invest in new opportunities, which could have a ripple effect on jobs and innovation.

3. Debates Around Mandatory Contributions

Then there’s the argument about whether mandatory contributions are the best way to go. Many people feel that personal savings options like RRSPs and TFSAs offer more flexibility and control. Unlike CPP, these let you decide how much to save and where to invest based on your own goals and circumstances.

My personal take is that I can see both sides of the argument. I understand the need to protect vulnerable Canadians, but the increases do feel like a lot to me, especially as a business owner and someone who likes to control their own investments. Personally, I would love it if there was a way to individually opt out of CPP given you meeting a certain set of criteria, for example a certain level of assets or net worth, but I understand that wouldn’t be the easiest to track. 

Money decisions always spark debate, especially broad reaching programs like the CPP, but the key is focusing on what you can control. That’s what we do here at Blueprint, which is helping you navigate the complexities of CPP and other financial decisions to create a personalized plan that works for you.

If you’re ready to take control of your retirement planning, check out our services or book free a consultation today.

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